First there was Y2K. Throughout 1999 we were warned that as the millennium dawned, computer software would go haywire. Banks would shut down. The grid would go black. Retirees would starve. Economic distress would spread like an oil spill. The joke around the newsroom of the three-month-old Daily Deal, was, well, how would you tell? Our computer network crashed so regularly that the copy desk installed a submarine horn to warn that we were going down.
It grew incredibly annoying. But Y2K never happened, and the buoyant, rushing dealflow, driven by the notion that we had entered a new digital age unlike any other in the history of mankind, coursed through December and swept us, lightheaded, into the chill of January 2000.
The call on Y2K should have been a lesson about the fallacies of prognostication (a theme to be renewed in 2001), particularly from the digiterati. In fact, contrary to the mythology, not everyone believed that the Internet, in the mantra of the day, "changed everything" or that the increasingly inflated stock market was sustainable. In the first issue of that year, Jan. 3, our own Matt Miller produced a feature with the headline "Wild for IPOs." Miller reported that 500 new companies had been created in the boom, and that 1999 had experienced a 75% increase in initial public offerings over 1998. "No equity analyst is predicting the collapse of the IPO market," he wrote. "At least not anytime soon."
Miller did explore the flip side of the euphoria, however. About 130 companies were trading below their IPO prices, including TheStreet.com Inc., 1-800-Flowers.com Inc., DLJdirect and Salon.com. But even experts who heard echoes of the '80s biotech bust in dot-com mania didn't see a downturn.
Then, less than two weeks later, came America Online Inc.'s $164 billion bid for Time Warner Inc., using its hugely inflated stock as currency. It was Monday, Jan. 10. Unusual for that period, no one leaked the deal to The Wall Street Journal that weekend for Monday publication. The announcement hit like a truck in the morning. In a now infamous 11 a.m. press conference, a weirdly short-sleeved Gerald Levin of Time Warner and Steve Case of AOL spoke of the very cool wonders of the digital revolution and the inevitability of convergence, with Levin declaring in words he would regret: "AOL Time Warner will lead this transformation, improving the lives of consumers worldwide."
The coverage was generally positive. We featured three stories that first day, led by Richard Morgan's main piece, then two others describing possible valuation and regulatory issues (The Wall Street Journal had 14 bylines Tuesday). The next day, we followed with four more, and stories continued for weeks. One of our best efforts was a scoop several months later that Cravath, Swaine & Moore LLP was working for Time Warner on retainer, betting its $35 million fee that the deal would close. If nothing else, AOL proved we could execute on our aim to cover complex deals from multiple perspectives and from announcement to close -- and beyond. Little did we realize what "beyond" meant.
AOL's acquisition of Time Warner, in hindsight, captured many facets of the nascent Internet bust. It was driven by a powerful and seductive theory -- Time Warner's Levin was nothing if not theoretical -- embodied in phrases like "transformation," "convergence," "revolution" and, of course, "synergies." The big deal would, in time, be undermined by incompatible corporate cultures and by realities of a boom built on evanescent business models.
It was also a case where timing was everything. Many argue now that this deal was destined to fail; that in any context it was one of the M&A stinkers of all time (in fact, AOL Time Warner is often used to argue that all M&A is bad). Well, it may later have reeked -- though it didn't appear so obvious at the start -- but the company survived. What if Time Warner had decided to buy upstart America Online in 1998 and had a year or two of good times to knit the two together? It may still have turned out badly, but the price and the hype might well have been more manageable.
Instead, the deal was cursed. A day after the announcement, Miller returned to the IPO beat. On Jan. 12 he discovered dot-coms were starting to fail after the holiday season. It was a harbinger, even as the Nasdaq took off in a furious sprint from 4,000 in late December to 5,000 in early March. On March 2, we reported how buyout shop Hicks, Muse, Tate & Furst Inc. had formed an alliance with two Internet investors, CMGI and Pacific Century Cyberworks Ltd., to pump $1.5 billion into Web deals outside the U.S. Our "Sense of the Market" column that day discussed "telecom fever;" Hicks Muse was a big player there too. PDA pioneer Palm Inc. went public at $150 a share on Thursday, March 3, then crashed to $95 on Friday. Dot-coms like Pets.com and online grocer Webvan began to seriously list.
On March 10, the Nasdaq peaked at 5,048 and by Monday the ground gave way. Over the next few months, the litany of IPOs was replaced by a dirge of dead dot-coms. Like the subprime crisis, the destruction started narrowly, sucking under first the most egregious Internet startups, then working out to the merely unprofitable or overleveraged. The dot-com implosion first seemed like a correction; after all, it was just a flock of money-losing startups, right? But dot-coms pulled tech down, which hammered telecom, which undermined the real economy. Deal activity, among both strategics and private equity, continued.
But by year's end, the falling stock market began to punish nearly everyone. In December it was clear that once-hot CLECs -- so-called competitive local exchange carriers -- were too weak to even buy one another.
Deals fell apart amid the Bush-Gore Florida recount drama. On the front page on Dec. 12, we reported on Internet access provider NorthPoint Communications Group Inc. suing Verizon Communications Inc. after the regional Bell (remember that sobriquet?) called off a merger and a bid by Verticalnet Inc. for SierraCities.com Inc. that was undermined by falling share prices. However, Wall Street rolled on and the banks were such fortresses that the first notions of banking impregnability emerged.
And there were other kinds of deals that, in hindsight, take on an eerie significance. On Dec. 13, Tom Hicks, whose buyout shop had not yet foundered on telecom, made a different kind of deal in his role as owner of the last-place Texas Rangers major league baseball team, where he once employed George W. Bush: signing Seattle Mariners star Alex Rodriguez for $252 million over 10 years, the then-biggest contract in baseball history. In his story, David Carey talked to a buyout executive about Hicks' free-spending ways. "As a bargaining tactic, we [once] offered to sell them an amount we thought was high. We expected them to talk us down. They didn't even try; they just said, 'Done!' "
Like AOL-Time Warner, Hicks' brand of Texas daring was already dying and few yet realized it. By Dec. 31, Nasdaq had slumped to 2,470. More importantly, great chunks of the conventional wisdom -- about the Internet, the role of first movers, of market share over revenues, of convergence, transformation and synergies -- bobbed away; and other tenets of the faith in markets and technology crumbled.
The cycle had shifted, the Zeitgeist was moving. There was a new president and much pain to be absorbed. AOL-Time Warner would close Jan. 11, almost exactly a year after the announcement. (On Dec. 18, we asked "Do more AOL-Time Warners loom?" The answer, even then: not likely.) The world had changed in all kinds of ways, but the submarine horn still sounded in the night.
Good god, another year.